A research report called “Why Brazil’s property boom looks like a bubble” was just published by our friends at Capital Economics (CE), and it notes that (surprise, surprise) Brazil is in the grip of a fully fledged house price bubble, with prices in Sao Paulo doubled since 2008 and in Rio tripled. The excellent 10-page report is probably the best we’ve read about the issue, offering relevant data and thorough analysis, with no strings attached.

One can only imagine the challenges that Mr. Neil Shearing and company faced in writing such a report, considering that “data on residential property prices are patchy” and “any analysis of Brazil’s property market is more of an art than a science,” as they put it. We share some of their views below:

“There are several reasons why we would have expected to have seen a sharp rise in Brazilian house prices over the past five years. But even so the sheer scale of the recent jump in prices is difficult to justify. As things stand, we estimate that the market is overvalued by as much as 50%.

For a start, the boom in Brazil’s economy over past few years has resulted in a surge in household incomes…. At the same time, the rapid development of a mortgage market has made housing finance easier and cheaper to access for millions of Brazilians… Yet it is difficult to escape the conclusion that Brazil’s housing boom has gone too far.

… our analysis suggests that house prices have increased out of all proportion to the rise in household incomes and the spread of mortgage finance. As a result, Brazilian housing now looks expensive relative to both incomes and rents, as well as property in other EMs.

… history suggests that structural shifts in the availability of mortgages – both in terms of the volume of loans and the terms on which they are made – often lead to a sharp rise in the price of property. Given this, it is very likely that the spread of mortgage finance has justified at least part of the jump in house prices in Brazil over the past few years.

Here [compared to the US and UK housing bubbles] it seems that the adjustment in the housing market will be more slow and gradual, with nominal prices falling moderately (or even stagnating) as incomes catch up. Looking ahead, Brazil’s ability to register relatively strong rates of nominal income growth should make it easier for the housing bubble to deflate slowly via an adjustment in real prices.”